Stock Cheat Sheet: Google

One formula can help investors learn about how this company makes lots of money.

Become an expert in less than five minutes: That's what a Motley Fool Cheat Sheet is all about. The best part of high school was study guides that hit the key points, summarized the main findings, and left out all the rest. If you're new to Google(Nasdaq: GOOG), consider this your Foolish way to get introduced and get in the know.

What it does:Everything. Seriously. From television to smartphones to its bread and butter, search, Google has its foot in the door in almost every tech arena out there. With that said, the company derives 99% of its revenue from advertising. You ask: How does that work?

The best way to think of Google is as an owner of a tremendous amount of real estate. Every time you make a search through its engine, the Goog returns a page of results. Think of each page as a physical location. Now think of advertisers setting up billboards to catch the attention of the eyeballs that go there. Far from being "tech-y" and abstract, this is a business model that has been around for a long time; the difference is that Google is able to do it more efficiently (by pairing up advertisers with the most relevant real estate for them to advertise on) and on a much larger scale (with a lot more real estate).

How it stacks up:Google's (and every other search advertising business's) revenue formula is actually very simple. For every x number of times a page is viewed (industry term: impressions; colloquial term: eyeballs), an ad is clicked y% of the time (industry term: click-through rate or CTR), and for every click, Google is paid by the advertiser $z (industry term: cost per click or CPC). So x times y% times $z = total revenue.

Calendar Year2009

x (Impressions)

y% (Click-through Rate)

$z (Cost per Click)

Total 2009Revenue

Google

1.682 trillion

1.89%

$0.72

$22.8 billion

Yahoo!(Nasdaq: YHOO)

408 billion

1.88%

$0.74

$5.7 billion

Microsoft(Nasdaq: MSFT)

162 billion

2.97%

$0.64

$3.1 billion

Baidu(Nasdaq: BIDU)

--

--

$0.16

$650 million

Why you should care:Think of how ubiquitous Google has already become. You already "google" for all your search needs. And in less than two years, Android has already laid claim to 28% of the entire smartphone market -- that's even more than Apple's (Nasdaq: AAPL) 21%. All of these efforts fuel the company's ability to assimilate more information, learn more about its users, and at the end of the day, use that information to create more compelling and more -- just more -- advertising real estate. The conspiracy theories are true: Google is watching you, Google knows everything about you, Google is taking over the world. The real question is: What are you going to do about it? If you can't beat them ...